Automated trading system in an electronic trading exchange

ABSTRACT

An electronic exchange system network includes a trader site having an automated trading system capable of submitting orders and/or quotes to an exchange site. The automated trading system determines whether an order or quote should be submitted based on, for example, the current market price of an option and theoretical buy and sell prices. The theoretical buy and sell prices are derived from, among other things, the current market price of the security underlying the option. The theoretical buy and sell prices are calculated when underlying factors that contribute to the theoretical prices change. Computation times of the theoretical prices may be reduced by using precalculated values and/or using interpolation and extrapolation. Other techniques may be used in addition or in the alternative to speed automatic decision-making. In addition, a system of checks may be conducted to ensure accurate and safe automated trading. The automated trading system may be capable of automatically submitting orders in connection with the underlying security in order to hedge part of the delta risk associated with the automated option trades.

TECHNICAL FIELD

The present disclosure relates to an automated trading system for use inan electronic trading exchange network system and, more particularly, atrading system that rapidly, accurately, and safely responds todesirable trading opportunities.

BACKGROUND

Trading exchanges historically provided a location for buyers andsellers to meet to trade stocks, bonds, currencies, commodities, andother items. The New York Stock Exchange and the Chicago MercantileExchange are examples of such trading exchanges. Recent advances incomputer and communications technology have led to electronic tradingexchange system networks. Electronic trading exchange system networksuse communications networks and computers to replicate traditionalface-to-face exchange functions. For example, centralized exchangecomputers disseminate market information, maintain records andstatistics, settle cash payments, determine risk based marginrequirements, and match trades. Matching of trades is typically done ona first come-first served basis, whereby time of order entry is animportant criterion for determining priority in fulfillment of atransaction.

A communications network connects the exchange computers to numeroustrader sites. Each trader site includes one or more trader stationsoperated by traders. Exchange network operators typically providetraders with interface software and, in some cases, hardware to enabletraders to view prices and other information relating to products and toexecute transactions by submitting orders and quotes. Orders arerequests to buy or sell a specified amount of a particular item at aspecified price. As an example, a trader may place an order to buy 100shares of IBM stock or a bid price of 57.25. Quotes differ from ordersin that quotes indicate bid price and ask prices, and bid and askquantities for a particular item. As an example, a trader may place aquote indicating she is willing to buy 100 shares of IBM stock for a bidprice of 57.0 and sell 100 shares of IBM stock at a price of 57.5.Retail customers, who may use brokers to execute their trades, typicallywill place an order to initiate a transaction. Professional marketmakers can use either orders or quotes, but tend to fulfill their roleof providing liquidity to a particular market by using quotes. Thistrading information is displayed in a grid or other organized formalMarket competition is fierce. Traders who can quickly identifyopportunities and act on them generate the largest profits.

Many trader stations in use today rely upon the traders themselves todecide whether to submit an order in response to a trading opportunitypresented through the exchange. In this regard, the trading informationis received from the exchange, processed, and displayed on a monitor ofthe trader's station. The trader reads the trading information from themonitor and decides whether or not to submit a matching order. Thetrader submits an order by entering instructions into the trader stationusing a keyboard or mouse, or even a gamepad or voice-activation asdescribed in U.S. application Ser. No. 08/273,362, filed on Mar. 22,1999 and incorporated herein by reference.

Attempts have been made to implement trading systems that automatedecision-making so that orders may be submitted with limited traderinteraction. These systems have a number of drawbacks. For example,user-friendly systems that automatically submit orders without traderinteraction, while faster than a human trader, are believed to berelatively slow in terms of computer speed due to application and systemdesign. In a typical set-up, trading information received from theexchange is processed by general purpose backend computer equipment. Thebackend computer may, among other things, (1) act as a gateway bycommunicating market information from the exchange to various types ofclient equipment, (2) submit, delete, and modify orders and quotes tothe exchange from the various client equipment, (3) receive real-timetrade confirmations and end-of-day back office reports, and (4) performrisk analysis, position management, and accounting functions. The traderstations are clients of the backend computer. The trader stations may betasked with numerous functions, such as (1) receiving and displayingreal-time market information, (2) creating and displaying theoreticalprices related to market products, (3) composing, submitting modifying,and deleting orders and quotes, and (4) maintaining positions andcalculating risk management, to name a few. Each trader station istypically configured in a very user-friendly, Windows-based environmentsince the trader will spend long periods of time each day watching andinteracting with it, The overhead associated with the functionsperformed by the backend computer and the trader stations reduces theresponse speed of automated trading.

In addition, computer equipment lacks the trading judgment of a humantrader. A computer can generate staggering losses in the blink of an eyeby submitting orders based upon incomplete or mistaken assumptionsinherent in the trading program, erroneous input data, or corrupted datarelied upon by the trading program. Accordingly, there exists a need inthe art for an automated trading system that rapidly responds to tradeinformation transmitted from an exchange, yet is safe and accurate.

SUMMARY

The present disclosure has been made in view of the above circumstancesand has as an object to provide an improved trading system that rapidlyresponds to trading information received from an exchange.

A further object of the disclosure is to provide an automated tradingsystem in an electronic trading exchange system that rapidly submitsorders in response to trading information received from the exchange.

A further object of the disclosure is to provide an automated tradingsystem that ensures the accuracy of automatic trading operations.

A further object of the disclosure is to provide an automated tradingsystem that performs automatic trading operations without the risk ofenormous losses due to erroneous, mistaken and/or repeated operation.

A further object of the disclosure is to provide a trading system in anautomated trader system that may be remotely controlled

A further object of the disclosure is to provide an automated tradesystem that automatically hedges some or all of the delta riskassociated with the execution of a trade by submitting an order inconnection with another, related trade opportunity.

Additional objects and advantages of the disclosure will be set forth inpart in the description that follows, and in part will be obvious fromthe description, or may be learned by practice of the disclosure. Theobjects and advantages of the disclosure will be realized and attainedby means of the elements and combinations particularly pointed out inthe appended claims.

It is to be understood that both the foregoing general description andthe following detailed description are exemplary and explanatory onlyand are not restrictive of the disclosure, as claimed.

BRIEF DESCRIPTION OF THE DRAWINGS

The accompanying drawings, which are incorporated in and constitute apart of this specification, illustrate embodiment(s) of the disclosureand together with the description, serve to explain the principles ofthe disclosure.

FIG. 1 illustrates an embodiment of an electronic trading exchangesystem network in accordance with the present disclosure.

FIG. 2 illustrates a further embodiment of an electronic trading systemnetwork in accordance with the present disclosure.

FIG. 3 provides a schematic of the functionality of an embodiment of anautomated trading system in accordance with the present disclosure.

FIGS. 4A, 4B, 4C, and 4D, collectively referred to in the description ofthe preferred embodiment as FIG. 4, illustrate an embodiment of atrading screen for use in connection with a trader station in accordancewith the present disclosure, with FIG. 4A being the upper left quadrant,FIG. 4B being the upper right quadrant, FIG. 4C being the lower leftquadrant, and FIG. 4D being the lower right quadrant of FIG. 4.

FIG. 5 provides a flow diagram of the steps performed in automatedtrading in accordance with the present disclosure.

FIG. 6 illustrates a further embodiment of an electronic exchange systemnetwork in accordance with the present disclosure.

DETAILED DESCRIPTION

The present disclosure recognizes that electronic trading exchangesystem computers may match bid and ask prices on a first come/firstserve basis. Accordingly, the speed and accuracy of submitting orders orother responses is critical to the trader's ability to participate inthe most profitable transactions. Even short delays in response mayfreeze a trader out of an otherwise lucrative transaction.

The present disclosure is capable of reducing the time it takes for thetrader to submit an order or quote in response to incoming tradinginformation from the exchange. In accordance with one aspect of thepresent disclosure, the automated trading system automatically decideswhether or not to submit an order or quote based on calculation logicand decision logic, and trading information received from the exchangecomputers. To decrease the response time, the automated trading systemmay be dedicated or substantially dedicated to performing automatedtrading operations, with limited or minimized overhead permitted forother tasks unrelated to trading. The present disclosure is furthercapable of reducing the time delay due to network lags arising from thetransfer of trading information from the exchange computers to theautomated trading system, and vice versa.

In an additional aspect of the present disclosure, safe and accurateautomated trading may be achieved by performing various checks of theinformation used in decision-making and/or information concerning theorder. Further, an automated hedging feature may be invoked which, whena trader takes a position in a security, reduces the time needed toestablish a delta hedge position in a related security.

Reference will now be made in detail to the present exemplaryembodiment(s) of the disclosure illustrated in the accompanyingdrawings. Wherever possible, the same reference numbers will be usedthroughout the drawings to refer to the same or like parts.

FIG. 1 provides a schematic of an embodiment of an electronic tradingexchange system network 10 that may be used in connection with thepresent disclosure. Other network arrangements may be used as well. Theelectronic trading exchange system network 10 includes an exchange site100 and a plurality of trading sites 200. For purposes ofsimplification, FIG. 1 illustrates an exchange site 100 linked to asingle trading site 200. Other trading sites 200 may be located in adifferent part of the same city as the exchange site 100, a differentcity, a different country, or different continent as the exchange site100. The exchange site 100 need not be limited to equipment provided ata single location, but may be provided in multiple locations linked by anetwork. Similarly, the trading sites 200 need not be limited toequipment provided at a single location, but may include equipment atmultiple locations linked by a network, such as a wide area network(WAN).

The exchange site 100 may be linked to the trading site 200 by one ormore communication links 300. The communication links 300 may be part ofa wide area network formed by dedicated communications lines,commonly-accessible communication lines, or a combination thereof. Forexample, dedicated lines may be strung between the exchange site 100 andone or more of the member trading sites 200. Alternatively, dedicatedlines may be leased from telephone, cable, or other communicationnetwork operators. For example, the public switched telephone networkmay embody the commonly-accessible communication lines. Of course, thecommunications lines 300 may also include, in whole or in part, wirelesscommunications, such as microwave or satellite links. While not shown inFIG. 1, an intermediary (such as broker for a retail customer, or aclearing member for a professional market maker) may exist between thetrading sites 200 and the exchange site 100, The role of an intermediarymay include some level of risk analysis to confirm, say, sufficientcapital exists to cover margin requirements for a potential resultingposition, or some level of network routing to, say, ensure an order issent to the intended exchange. Under the cases where risk analysischecks are passed and the routing information is proper, an intermediaryshould be transparent or substantially transparent to the functionalitydescribed herein and may be subsumed in the communication links 300. Ofcourse, additional time delays may be introduced by any suchintermediary processing.

In one embodiment, the exchange site 100 may be designed as a local areanetwork (LAN) and include, for example, one or more security routers andone or more back office computers, among other equipment For purposes ofillustration only, two security routers 111, 112 and three back officecomputers 130-1,130-2,130-3 (referred to collectively as back officecomputer 130) are shown in FIG. 1. The security routers 111, 112 controlcommunications between the back office computers 130 and thecommunications links 300. Each security router 111, 112 transmits andreceives communications over the communications links 300, as well asrestricts communications from unauthorized sources. More particularly,the security router 111, 112 may be used to isolate the equipment at theexchange site 100 from intrusion and facilitate communication with theback office computers 130.

The back office computers 130 manage the trading of the varioussecurities (e.g., futures, options, swaps or other derivatives;currencies, stocks, bonds, or other physicals like corn, preciousmetals, electricity, etc.) and/or other items traded on the exchange.For example, one or more of the back office computers 130 may functionas market servers. In this capacity, they may maintain order books,perform order matching, generate market information for use at theexchange site 100 and/or for transmission over the communication links300, and supply trade information to other back office computers 130 foraccounting and/or cash settlement purposes. One or more of the backoffice computers 130 may function as short-term accounting servers. Assuch, these computers may receive information from the market serversand generate information for transmission over the communication links300. The short-term accounting servers may be initialized with statusinformation from the previous day's trading before performing accountingtasks for the current day. One or more of the back office computers 130may function as long-term account servers and, accordingly, function tocollect data from the short-term accounting servers for batch processingand record-keeping. The long-term account servers may supply informationto initialize the short-term account servers and generate reports fortransmission to trading sites 200. Of course, the back office computers130 may perform additional functions and a single computer may performmore than one of the above functions.

The trading sites 200 may include a LAN architecture having one or moresecurity routers, one or more backend computers, one or more traderstations, and one or more hubs, among other equipment. For purposes ofillustration only, FIG. 1 shows two security routers 211, 212, twobackend computers 220, 225, three trader stations 230-1, 230-2, 230-3,(collectively referred to as trader stations 230) and two hubs 240, 241.The security routers 211, 212 transfer trading information between thetrading site 200 and the exchange site 100 and screen communicationsfrom unauthorized sources. The hubs 240, 241 distribute data between thebackend computers 220, 225 and the trading stations 230.

Backend computer 220 may be configured as a communication server for thetrader stations 230. The exchange may supply software and/or hardwarefor the backend computer 220 to facilitate communications with theexchange site 100. Alternatively, the exchange may simply provideprotocol specifications that enable the trader site computers tocommunicate with the exchange computers. In this case, the trader hasflexibility in choosing how it implements the protocol specificationsrunning locally at trading site 200. Alternatively, if an intermediarysite, such as a broker or clearing member site, is part of thecommunications routing between the exchange site and the trader site,the backend computer 220 may use communication software supplied by theintermediary site or, if permitted, communication software developed bythe trader or a third party. Backend computer 220 handles communicationsbetween the trader stations 230 and the back office computers 130 of theexchange. Of course, the trader site 200 may include multiple backendcomputers 220.

Backend computer 225 may also be equipped with software and/or hardwarethat facilitates communications with the exchange site and/or theintermediary site. Some exchanges, for example, such as the EUREX (theGerman and Swiss Derivatives Exchange), recommend installation of aredundant on-site backend computer in the event that the primarycommunication backend computer 220 fails. In the case of the EUREXexchange, backend computer 225 may be configured to perform automatedtrading functions under the control of one or more of the traderstations 230. The automated trading functions are described in moredetail below. The backend computer 225 should be equipped with ahigh-speed processor and sufficient memory to efficiently handleautomated trade processing. The trader stations 230 may control backendcomputer 225 remotely through a communication link 250, for example, aWAN. The trader site 200 may include multiple backend computers 225.

In one preferred embodiment, backend computer 225 is dedicated orsubstantially dedicated to performing automated trading-relatedfunctions, as discussed in greater detail below. Backend computer 220,rather than backend computer 225, may be assigned trading-related tasks,such as (1) serving as a gateway to communicate market information fromthe exchange site 100 to trader stations 230, (2) submitting, deletingand modifying orders and quotes to exchange site 100 from the traderstations 230, (3) receiving real-time trade confirmations and end-of-dayback office reports, and/or (4) performing risk analysis, positionmanagement, and accounting functions. In this way, backend computer 225may perform automated trading functions with limited interruption ordelays associated with other tasks the backend computers (such asbackend computer 220) may be requested to perform. This increases theresponse speed for automated trading operations. Moreover, the totaltime delay in submitting an order to the exchange site 100 includes acomponent attributable the transmission delay or network lag intransmitting messages between the exchange site 100 and the trader site200, Therefore, backend computer 225 is preferably located near to theequipment of the exchange site 100 to reduce delays associated withtransmitting information and orders between the backend computer 225 andthe exchange site 100. Accordingly, the total time for responding totrading opportunities can be reduced both by reducing transmissiondelays and by increasing decision-making speed at the trader site 200.Significantly, the backend computer 225 may be remotely supported orcontrolled by a distant trader station 230, which permits the traderstation 230 to be located virtually anywhere without adversely affectingthe response time of the automated trading system. Accordingly, thetrader site 230 may be chosen based on considerations such as tax, realestate costs, and quality of life, without having to worry that traderstation location will impair the performance of automated tradingcarried on by backend computer 225.

Trader stations 230 receive information from the exchange site 100,process that information, and display at least part of it on a monitor.Each trader station 230 typically runs interactive software that enablesa trader, among other things, to submit orders and/or quotes to theexchange site 100. As discussed further below, one or more of the traderstations 230 may additionally be equipped with software for controllingthe automated trading functions of backend computer 225.

FIG. 2 illustrates an alternative embodiment of an electronic tradingexchange system network 20. For the sake of brevity, features of FIG. 2similar to those in FIG. 1, which are described above, will not berepeated. In FIG. 2, the trading site 200 includes an automated tradingsystem computer 225-2 separate from the backend computer 225-1. In thisembodiment, the automated trading system computer 225-2 performsautomated trading system functions and the backend computer 225-1manages communications between the automated trading system computer225-2 and the exchange site 100. The automated trading system computer225-2 may be connected to the backend computer 225-1 using, for example,network interface cards or through a hub (not shown). The automatedtrading system computer 225-2 may be controlled using one or more traderstations 230 either locally or through a communication link 250.Alternatively, the automated trading system computer 225-2 may becontrolled through the communication computer 225-1 (as indicated by thedotted lines), which would serve to communicate information between thetrader stations 230 and the automated trading system computer 225-2.

FIG. 3 provides a functional diagram illustrating the operation of anembodiment of an automated trading system used in connection withoptions trading. Of course, the embodiment may be modified for use intrading other securities (e.g., futures, swaps or other derivatives;currencies, stocks, bonds, or other physicals like corn, preciousmetals, electricity, etc.) and/or other items traded on the exchange. Asdescribed in greater detail below, the general function of the automatedtrading system is to generate and automatically submit responses (suchas orders or quotes) for transmission to an exchange based on marketdata received from the exchange and/or other sources. The automatedtrading system may perform this function in several different ways, asdiscussed greater detail below, including calculating a theoreticalvalue for the traded item in real time when one or more of theunderlying factors that affect the theoretical value changes, Thecalculated theoretical value is then used to determine whether an orderor quote should be submitted based upon existing market prices for thetraded item.

The automated trading system is preferably resident in the backendcomputer 225 as configured in FIG. 1, which may utilize multiple CPUs.However, it may also be resident in one or more of the trader stations230 or the backend computers 220. The automated trading system softwaremay run in a text-based environment or a Windows or Windows-likeenvironment. For example, the automated trading system may be run on anoperating system, such as VMS, DOS, or LINUX, or in a WINDOWS or similaroperating system, which is more user-friendly. In some operatingsystems, automated trading may be assigned priority over other tasks orprocesses and run without debug messages. Local decision-making times ofless than 250 microseconds have been achieved in a text-based VMS systemrun on a backend computer 225 and times of 50-150 milliseconds or lesshave been achieved on a Windows-based system run on a trader station230, depending on the processor load from other tasks. In some operatingsystems, automated trading may be assigned priority over other tasks orprocesses and run without debug messages.

The automated trading system receives and decodes current marketinformation broadcast from the exchange site 100 through a receiverinterface 410. The decoding of market information may be performed, forexample, transparently by software supplied by the exchange for use withthe backend computers, by the exchange software at the request ordirection of the automated trading system, or by the automated tradingsystem itself. The current market information may include informationrelated to the options and an underlying security of the option. Marketbid, ask and last prices and the day's volume for call and put optionsand the underlying security, to name a few, are typically received bythe trader site. A call option is the right to buy the underlyingsecurity at a specified time in the future at a specified price, while aput option is the right to sell the underlying security at a specifiedtime in the future at a specified price.

An option look-up table protocol 420 indexes an option data table 430.The option data table 430 stores information concerning options that maybe automatically traded. For simplicity, a two-dimensional table havingrows and columns will be described. However, it should be understoodthat higher dimension arrays or tables may be used in connection withthe present disclosure. Each row of the option table 430 storesinformation relevant to a particular option including for example,option name, current market option prices, times and quantities of themost recent trades by the trader, maximum order quantity, inputs thatmay needed to calculate option transaction prices, and whether automatedtrading is enabled for the option. As discussed further below, thisinformation may be used as a check against erroneous operation.Alternatively, option data table 430 may store information in connectionwith items that are actually being automatically traded at a given time.As a further alternative, option data table 430 may store information inconnection with all of the options that may be subject to automatedtrading and include indices or pointers that link only the itemscurrently enabled for automated trading. Accordingly, any search of theoption data table can skip those entries for which automated trading isnot enabled. In such a case, an additional option data table may bemaintained for the full set of items for which automated trading may beperformed. This is useful in increasing the speed at which a disabledoption can be enabled. Accuracy checks may use both the additionaloption data table and option data table 430. Communications between theautomated trading system and the trader stations 230 are conductedthrough a trading station interface 440. For example, a trader station230 may update information contained in the option data table 430 via atrading station interface 440. In this way, the option data table 430may be updated to enable (disable) automated trading for a particularoption.

The option data table 430 may be organized in several different ways.For example, the market bid and ask prices for a particular option maybe stored in different rows of the option data table 430. Alternatively,the bid and ask prices may be stored in the same row of the option datatable 430, but in different columns, or as different cells in a pricedimension, for example. Also, the option data table 430 may besegmented, for example, so that all bid prices are grouped together andall ask prices are grouped together. Different classes of options (i.e.,options with different underlying securities) may be indexed in a singledata table 430 or in multiple look-up tables 430, for example, with eachoption having its own look-up table 430.

In addition to the current market information concerning option trading,the automated trading system may receive and decode current marketinformation concerning the security (or securities) underlying theoptions. For example, an exchange that trades the underlying securitytypically maintains a book of bid (ask) prices and quantities of currentorder and quotes of those traders wishing to buy (sell) the underlyingsecurity. The automated trading system may receive the underlying marketinformation, for example, from the exchange site 100, from a separateexchange site, or from another market feed either directly orindirectly, e.g., through a trader station 230. The underlying marketinformation for a given security may be stored in option data table 430,which may be formed in the memory of backend computer 225, since it maybe one of the inputs needed to calculate option transaction prices.Theoretical price table 435, which may be formed in the memory ofbackend computer 225, may store option transaction prices for optionsdefined in option data table 430 and/or the additional option data tabledescribed above.

The theoretical prices for derivatives, such as options, may bedetermined using complex mathematical models. Theoretical price logic490 is tasked with generating the theoretical prices based on inputinformation. Theoretical price logic 490 may be implemented in hardwareor in a combination of hardware and software. For example, theoreticalprice logic may be implemented by the central processor and memory, andpossible other equipment useful in perforating fast mathematicalcalculations, in a general purpose computer. Alternatively, thetheoretical price logic may be implemented in a separate processor incommunication with the processor of a general purpose computer or anarray of processors. Of course, theoretical price logic 490 may beembodied by other devices capable of generating theoretical prices asdescribed herein.

Theoretical price logic 490 generates theoretical prices in accordancewith mathematical models. The mathematical models produce a theoreticalvalue for an option given values for a set of option pricing inputvariables that may change over time. Option pricing input variablesconsidered in these models may include (1) the current market price ofthe underlying security (e.g., the price of the stock or future fromwhich the option is derived), (2) interest rates, (3) the futurevolatility of underlying security, (4) dividend stream, (5) time untilexpiration, (6) whether the option can be exercised before theexpiration date, and (7) whether the option is a call or put. Optionpricing input variables (2)-(7) are not likely to change as frequentlyas the price of the underlying security, option pricing input variable(1). Some option pricing input variables, such as price of theunderlying security, can be derived from the market. Other optionpricing input variables, such as the future volatility of the underlyingsecurity, require some qualitative assessment by the trader.

The current market price of the underlying security may be defined inseveral different ways. At any given time during normal trading, theunderlying security will usually have: (1) bid prices and quantities;(2) ask prices and quantities; (3) a last price and volume at which theunderlying security was traded (last price); (4) an average of thecurrent highest bid and lowest offer prices (average best bid, best askprice); and (5) an average price of a certain depth, among other values.The average price of a certain depth, say 5000 shares, would take theaverage of the: (a) best (highest) bid prices in the book of the first5000 shares, and (b) best (lowest) offer prices in the book of the first5000 shares. Obviously, there are many more definitions of underlyingprice that can be created, for example, using permutations of the fivedefinitions provided above.

It is highly probable that at least four of these five definitions willyield (perhaps slightly) different results at any time. Since the normalhedging response of an option trade is to buy or sell the underlyingsecurity, the option trader may very carefully define underlying priceused in her models. Specifically, buying (selling) calls and selling(buying) puts will usually lead to selling (buying) the underlying forhedging. For reasons discussed further below, the trader may want to setthe theoretical buy price for call options and the theoretical sellprice for put options using the bid price (and/or possibly bidunderlying depth) of the underlying security. Likewise, the trader maywant to set the theoretical sell price for call options and thetheoretical buy price of put options using the ask price (and/orpossibly the ask underlying depth) of the underlying security. Insummary, theoretical value calculations used for automatic optiontrading may use any of several definitions of underlying price.

In addition to generating a theoretical value for an option, the tradermay select a buy spread and a sell spread to compute an optiontransaction price. The buy spread may be subtracted from the theoreticalvalue to produce the theoretical buy price—the highest price at whichthe trader is willing to buy a particular option using automatedtrading. The sell spread may be added to the theoretical value toproduce the theoretical sell price—the lowest price at which the traderis willing to sell a particular option using automated trading.Accordingly, the trader would like to sell an option having a bid pricethat is the same as, or higher than, the trader's theoretical sellprice. The trader would like to buy the option from anyone offering aprice that is the same as, or lower than, the trader's theoretical buyprice. Of course, buy and sell spreads may be defined by the trader ineither absolute terms (i.e. theoretical buy price=theoreticalprice−0.10) or percentage terms (i.e. theoretical buy price=theoreticalprice−0.01*theoretical price). In summary, buy and sell spreads may beused to calculate option transaction prices such as theoretical buy andsell prices.

Accordingly, in the embodiment illustrated in FIG. 3, the theoreticaltable 435 stores option transaction prices including a theoretical buyand sell price of the options for which automated trading is performed.For example, if automated trading is performed for options underlyingExxon stock, the theoretical price table 435 contains the theoreticalbuy and sell prices of Exxon stock options. If any of the inputsaffecting option transaction price changes, the theoretical price table435 can be updated. Of course, the theoretical price table 435 may beformed as part of the same table as option data table 430. However,option data table 430 and theoretical price table 435 will be describedseparately for the sake of convenience and not by way of limitation.

Similar to the option data table 430, the theoretical price table 435may be organized in several ways. For example, all theoretical optionbuy prices for a given set of option pricing input variables (1)-(7) maybe provided in a single column of theoretical price table 435, with aseparate theoretical table provided for theoretical sell prices.Alternatively, the theoretical table 435 may index both a theoreticalbuy price and a theoretical sell price. The theoretical price table 435may be segmented or multi-dimensional. Moreover, the theoretical pricetable 435 may be combined with, form a portion of, or be linked tooption data table 430. The values in theoretical price table 435 may becompared with market option prices and may trigger automated buy or selldecisions by the system. While the theoretical price table 435 may takemany forms, a table like the option data table 430 with each rowrepresenting a single option will be described for purposes ofsimplicity. As noted above, it should be understood that data structuresother than tables may be used in connection with the present disclosure.

In addition, the option data table 430 and theoretical price table 435can be structured consistent with the particular search protocol used bythe table update protocol 420 so that certain options or other items arelocated by the update protocol before other options or items. Forexample, if table update protocol 420 implements a linear search, thecontents of option data table 430 for options at the top will be updatedbefore options at the bottom even when multiple rows need updating. Ifthe change in content affects the option transaction prices stored intheoretical price table 435, this implies options near the top could berecalculated and compared against market option prices before options atthe bottom theoretical price table 435. Accordingly, the trader station230 or the backend computer 225 may structure the option data table 430and/or the theoretical price table 435 so that options that have shownin the past, or are likely to show in the future, the most promisingprofits will be located first. The particular order of the options inthe tables 430 and 435 may depend on the trading volume in an option,for example. Options with relatively high traded volumes over recenttrading days or the current trading day may be given a higher priorityrating in table 430 and/or theoretical price table 435. Moreover, someexchanges may limit the number of orders or quotes that a particulartrader may have pending at a given time. For example, in some versionsof the EUREX system, a trader can not submit a new quote before aconfirmation that a previously submitted quote had been received fromthe exchange. Accordingly, structuring the tables 430 and 435 asdescribed increases the opportunity for the trader to participate in themost lucrative transactions when there are restrictions on the number ofconcurrent orders placed. In addition, or in the alternative, thetheoretical price logic 490 may calculate theoretical prices first foroptions likely to yield the highest profits. The calculated theoreticalprices may be supplied to the decision logic 490 either before thetheoretical price logic calculates the theoretical price of anotheroption or concurrently therewith.

In accordance with the embodiment shown in FIG. 3, the trader station230 may respond to changes in market conditions by changing any of theoption pricing input variables (1)-(7), changing buy or sell spreads, orchanging any other variable that might effect option transaction prices.These changes would update the appropriate values for each option of theoption data table 430 and then, since the changes affect optiontransaction prices, would trigger a recalculation of theoretical buyand/or sell prices in theoretical price table 435. Of course, updates tooption data table 430 may originate directly from exchange 100 orbackend computer 220, or even some other source. For instance, optionpricing input variable (1), the price of the underlying security, usedin option pricing models, may be received dynamically by backendcomputer 225 from exchange 100 rather than being received from tradingstation 230. In this case, option data table 430, and, subsequently,theoretical price table 435 would be updated automatically in real timewith no trader intervention.

Calculating the theoretical value for options or other financialderivatives can be relatively time consuming. The speed of thesecalculations becomes especially critical when considering an exchange,such as the EUREX may list some tens of thousands of options that atrader may want to continuously evaluate in real time. The time neededto calculate these values may depend upon the option's specifications,the particular mathematical model used to calculate the theoreticalvalue, the use of pre-calculation or other calculation short cuts, andthe level of desired precision of the calculated theoretical value.Obviously, hardware is also an important consideration, as faster andmore efficient computers tend to reduce calculation times. Below is acomparison of some average times (in microseconds, us) needed tocalculate a single theoretical price of some common options withdifferent specifications using different mathematical models on PC usinga Pentium III 450 MHz CPU and 128 MB of RAM:

Option Specifications Models Type of Implicit Roll- Underlying EarlyBlack- Cox- Garman- Finite Geske- Security Exercise Dividend BlackScholes Rubenstein Kohlhagen Difference Whaley Future No No 1.9 1.9 32.5NA 338 NA Future Yes No NA NA 77.0 NA 397 NA Stock No No NA 1.7 32.2 NA338 NA Stock Yes No NA NA 76.7 NA 396 NA Stock No Yes NA 1.9 33.4 NA NANA Stock Yes Yes NA NA 78.0 NA NA 67.7 Currency No No NA NA 32.5 NA 339NA Currency Yes No NA NA 80.7 2.1 397 NANote, an “NA” means the mathematical model is not appropriate tocalculate a theoretical price of an option with those specifications.The option specifications and each of the theoretical price models areknown in the art and will not be described here. Of course, othermathematical models may be used besides the ones listed above.

Note that these times can vary as much as a factor of about 200×. Ifspeed were the only consideration for choosing the model to use forcalculating values in theoretical price table 435, then the modelshaving the smallest computation times would probably be picked. However,other factors may be taken into account when selecting a model. Forinstance, a trader may find that certain models yield theoretical pricesthat are more market-realistic than other models. The trader willultimately profit by trading (buying and selling) with other marketparticipants. Thus, a particular trader may select a model that, in thetrader's opinion, best reflects these trading conditions, even at theexpense of higher computation speeds. Accordingly, comparisons betweentheoretical prices and actual market prices may be necessary to decidewhich mathematical model to use. This comparison and model decision maybe re-evaluated over time to reflect any changes in market conditions.

The times cited in the table above are typical for calculating a singletheoretical option price without the use of pre-calculations,approximations, or other computational short cuts. Times for calculatingsubsequent theoretical prices for a given option may be reduced if partof the calculation made for the original option is stored and then usedfor the next calculation, or part of the calculation has beenpre-calculated entirely before the first theoretical price has beencalculated, Moreover, using part of the calculation of an option that issimilar to the given option may reduce the calculation time for a givenoption.

For instance, the Black and Black-Scholes models contain an exponentialterm (e^(−rt)) related to the cost of carry. This term is unlikely tochange frequently, since the three terms (e=natural log constant, r=theinterest rate, and t=time until the expiration of the option) areunlikely to change frequently for a given trading day. This means thatthe term e^(−rt) may be pre-calculated before the first theoreticalprice is calculated, or stored after the first theoretical price iscalculated Using the approach of pre-calculating the exponential terme^(−rt), the computation times needed for the Black model for futureswith no early exercise and the Black-Scholes for stock with no earlyexercise and a dividend can be reduced by about 30% (1.1 us vs 1.7 usfor Black, 1.3 us versus 1.9 us for Black-Scholes model). Likewise, theCox-Rubenstein model has calculations which are: (1) common to allstrike prices for a given underlying price and volatility, and (2)common for a given strike price independent of underlying price. Usingthe approach of using pre-calculated common values such as base nodes,the calculation times needed for the Cox-Rubenstein model for stock withdividend and early exercises may be reduced by about 10% (69.4 us versus78.0 us). Likewise, the Garman-Kohlhagen model has calculations that areindependent of strike price and underlying price. Specifically, thereare two exponential terms like the one in Black and Black-Scholes,related to cost of carry in domestic and foreign currencies. If thesevalues are pre-calculated, the computation times needed for theGarman-Kohlhagen model for currencies with early exercise can be reducedby about 40% (2.1 us versus 1.2 us). Likewise, the Roll-Geske-Whaleymodel uses a term that yields the underlying price assumed necessary forearly exercise for call options. This term is independent of strikeprice and underlying price and is solved using numerical analysis. Ifthe value of this term, as well as some exponential terms related totime decay are pre-calculated, the calculation times needed for theRoll-Geske-Whaley model for stock with dividend and early exercises maybe reduced by about 60% (37.2 us versus 67.7 us). Thus, pre-calculationof certain parts of the mathematical models used for determiningtheoretical prices may reduce total computation times of single orgroups of similar options. Pre-calculation may be performed by back endcomputer 225, trader stations 230, back end computer 220, or anothercomputational resource, for example, upon initialization of thesecomputers or upon selection of automated trading. Of course, rather thancalculating the theoretical values in real time, a pre-calculatedlook-up table of theoretical values may be used, as described in U.S.application Ser. No. 09/417,774 to Marynowksi et al., filed on Oct. 14,1999, and expressly incorporated herein by reference.

Pre-calculating certain parts of the mathematical models reducescomputation times without compromising the precision of the models. Thismeans a theoretical price of a given option under a given set ofconditions calculated using a given model using pre-calculated valueswould be identical to the theoretical price calculated using nopre-calculated values. Also, pre-calculating certain parts of themathematical models also allows the off-loading of this computationaloverhead from the computers assigned to automated decision making. Forinstance, in one preferred embodiment, the pre-calculating tasks can bemoved from backend computer 225 to, say, trading station 230. In thiscase, trading station 230 may calculate the required pre-calculatedvalues upon initialization and any time one or more of the inputs ofterm being pre-calculated changed. The pre-calculated values may bestored in option data table 430 and used by backend computer 225 whenupdating theoretical price table 435.

Extrapolation may also be used to reduce computation times when usingmathematical models to compute theoretical option prices. Consider thecase when a theoretical option price has been computed for a given setof conditions. The input most likely to change is the price of theunderlying security of the option. The mathematical models discussedabove allow for the first derivative (the “delta” of an option) andsecond derivative (the “gamma” of an option) of the theoretical optionprice with respect underlying price to be calculated. If an option'stheoretical price, delta, and gamma are known for a given set ofassumptions, and only the price of the underlying security changes, anextrapolated theoretical price at the new price of the underlyingsecurity may be calculated based on the previously calculatedtheoretical price and the delta and gamma Consider the example where forgiven set of option pricing input variables (2)-(7) and price of theunderlying security=80.00, the theoretical price of the option=7.20,delta=0.40, and gamma=0.10, Now assume the price of the underlyingsecurity changes from 80.00 to 80.60, or a change of +0.60, Using theextrapolation method, the new theoretical option price can be estimatedas: Old Theoretical Option Price+(Change in UnderlyingPrice)*(Delta+Change in UnderlyingPrice*Gamma/2)=7.20+(0.60)*(0.40+0.60*0.10/2)=7.46. The pre-calculateddelta and gamma values may be stored in option data table 430, orelsewhere. The table below summarizes typical computation times (inmicroseconds) using baseline, pre-calculation and extrapolation methods:

Option Specifications Methodology Early Base- Pre- Extra- SecurityExercise Dividend Model line calculated polation Future No No Black 1.91.1 0.48 Stock No Yes Black- 1.9 1.3 0.48 Scholes Stock Yes Yes Cox-78.0 69.4 0.15 Rubenstein Currency Yes No Garman- 2.1 1.1 0.47 KohlhagenStock Yes No Implicit 396 NA 0.19 Finite Difference Stock Yes Yes Roll-67.7 37.2 0.90 Geske- Whaley

Note that the extrapolation methodology times include the steps ofcalculating the delta and gamma at the original underlying securityprice, as well as the actual extrapolation step. As the results aboveshow, the extrapolation method yields considerably lower computationtimes compared to the baseline and pre-calculate methods. Also, notethat the computation times of the extrapolation methodology arerelatively consistent in absolute terms (i.e. less than 1.0 microsecond)across model type. This arises because the calculation of the delta andgamma, and the extrapolation step can be performed quickly relative tothe entire process of calculating the theoretical option price usingeach of the models. Of course, the delta and gamma may be calculated ina prior step before the extrapolation calculation is initiated, whichreduces the overall time to obtain the extrapolated theoretical price.

The advantage in speed of the extrapolation method may be offset bydeficiencies in precision under certain circumstances. The extrapolationmethod assumes a constant gamma value over the range of the old and newunderlying prices. This assumption may lead to differences in calculatedtheoretical option prices compared to using the baseline methodologywith the same model at the new underlying price. The differences arisebecause the actual gamma was not constant across the range of underlyingprices being considered. The magnitude of these differences may dependupon many factors, including time left to expiration, volatility assumedof the underlying security, strike price of the option relative tounderlying security price, and magnitude of expected differences betweenthe old and new underlying prices. Thus, the extrapolation method maynot always be adopted, since there may be a trade-off betweencomputation speed and precision. Accordingly, the trader may want toevaluate the magnitude of differences in precision for her particulartrading conditions before adopting the extrapolation methodology.

Of course, the delta and gamma values used in the extrapolation methodmay be pre-calculated by a computer different than the computer makingthe automated trading decisions. For instance, in one preferredembodiment, the task of pre-calculating the delta and gamma values maybe moved from backend computer 225 to, say, trading station 230. In thiscase, trading station 230 may calculate the required delta and gammavalues upon initialization and any time one or more of the inputs usedto calculate the delta and gamma values change by some pre-definedquantity. These delta and gamma values may be stored on backend computer225 in option data table 430. If trading station 230 precalculates thedelta and gamma values in option data table 430, the time forcalculating a theoretical price using the extrapolation method becomesindependent of the mathematical model used to generate the delta andgamma values stored in option data table 430. This is because the deltaand gamma values are pre-calculated and do not have to be calculated aspart of the extrapolation. Using the hardware specifications describedabove (i.e. 450 MHz Pentium III cpu, 128 MB RAM), typical computationtimes are less than 0.01 us.

Interpolation is another method to reduce computation time needed tocalculate theoretical prices for options. Consider the case where thetheoretical option prices are calculated for a given set of conditions,but for varying underlying prices. For instance, option pricing inputvariables (2)-(7) may be assumed constant and theoretical option pricesmay be calculated using, for example, underlying prices that vary thesame amount above and below the current underlying price. Assumetheoretical prices are calculated for a given set of conditions withoption pricing input variables (2)-(7) remaining constant and for thefollowing underlying prices to form an interpolation table:

Assumed Theoretical Underlying Price Option Price 80.50 2.66 80.00 2.5079.50 2.30Using these points and assuming, say, a linear relationship betweenunderlying price and option price, theoretical option prices may becalculated using interpolation for any new underlying price between79.50 and 80.50. For instance, assume the underlying price changed tofrom 80.00 to 79.60. Using a linear interpolation method, the newtheoretical option price can be calculated as:New Theo Price=Theo1+(AUPnew−AUP1)*(Theo2−Theo1)/(AUP2−AUP1) where:

New Theo Price—the new theoretical option price for the new underlyingprice,

Theo1—the theoretical option price for the first assumed underlyingprice (2.30),

AUPnew—the new underlying price (i.e., 79.60 in the example),

AUP1—the first assumed underlying price (79.5 in the example),

Theo2—the theoretical option price for the second assumed underlyingprice (2.50 in the example), and

AUP2—the second assumed underlying price (80.0). In the example, the NewTheo Price is calculated to be 2.34.

Interpolation is similar to extrapolation in that precision may besacrificed since a constant, say linear, relationship is assumed toexist between theoretical option price and underlying price over therange of underlying prices used for interpolation. This constantrelationship may not be valid and the actual theoretical option pricecalculated using the same model at, say 79.60, would be somewhatdifferent than the interpolated result of 2.34. As with theextrapolation method, the magnitude of these differences may depend uponmany factors. These factors include time left to expiration, assumedvolatility of the underlying security, strike price of the optionrelative to underlying security price, difference between assumedunderlying prices, and distance between the expected underlying pricesand assumed underlying prices. Of course, there is no sacrifice inprecision for any underlying price found in the interpolation table,since these theoretical option prices have been calculated exactly forthose underlying prices.

Likewise, reducing the distance between assumed underlying prices usedfor interpolating may increase precision. For example, addingtheoretical option prices for underlying prices of 80.25 and 79.75 tothe interpolation table above would probably improve precision ofcalculated theoretical option prices. This arises because the (1)assumed linear relationship between underlying price and theoreticaloption price is over a smaller underlying price distance, and (2) chanceof an underlying price matching an underlying price already in the tableincreases. Of course, if the new underlying price equals one of theassumed underlying prices in the interpolation table, no interpolationis required and the theoretical prices corresponding to the underlyingprice may be passed to the theoretical price table 435. Obviously, theinterpolation table can be expanded to include all possible underlyingprices within an expected underlying range, since the exchange usuallydefines a minimum “tick size” (i.e., smallest increment of change) ofthe underlying security. In the limit of the interpolation tableincluding all possible underlying prices (say between 79.00 and 81.00,in steps of 0.01) the interpolation table resembles a look-up tablesince no interpolation is necessary for any underlying price within theunderlying price range. The use of a look-up table to calculatetheoretical values is described in U.S. application Ser. No. 09/417,774to Marynowski et al., which is incorporated by reference.

Times needed to calculate new theoretical option prices are the fastestwhen values in the table above are pre-calculated and the new underlyingprice falls in the range of the underlying prices in the table. Underthese conditions and using the hardware specifications described above(i.e., 450 MHz Pentium III cpu, 128 MB RAM), typical computation timesfor underlying prices not matching an underlying price in the table areless than 0.01 us. Interpolation between any two assumed underlyingprices requires a constant time (i.e. less than 0.01 us), regardless ofmodel used to calculate the theoretical prices if the theoretical pricesare in the pre-calculated interpolation table. Calculation of thetheoretical option prices can be done away from backend computer 225 on,say, trading station 230. The interpolation table may be dynamicallycentered around the market underlying price. For instance, tradingstation 230 may be asked to calculate and send backend computer 225 anew interpolation table if the underlying price moves outside of somepre-defined underlying price range. The interpolation table, containingunderlying prices and the corresponding theoretical option prices, canbe stored in option data table 430 on backend computer 225, in thetheoretical price logic, or in another accessible memory location. Newtheoretical option prices calculated for the current underlying pricemay be stored in theoretical price table 435.

Referring still to FIG. 3, decision logic 450 compares the theoreticalprice calculated and stored in the theoretical price table 435 to themarket price for the option and, based on the comparison, determineswhether the option should be bought or sold, or no action should betaken. For example, in an embodiment in which the theoretical pricetable 435 stores theoretical buy and sell prices for a particularoption, decisions may be triggered when: (1) a theoretical option pricein table 435 changes, but the market bid and ask prices of the optionremain the same, (2) the market bid or ask price of the option changes,but the theoretical prices in table 435 remains the same, (3) automatedtrading is enabled for a particular option, and (4) when safety checksare relaxed for a particular option.

Consider example (1) in which a theoretical price of a particular optionstored in theoretical price table 435 changes and the bid and ask pricesof an option remain static. As noted above, the theoretical price table435 may be updated when one or more of the values that affect thetheoretical buy and sell prices changes such as, but not limited to, thebuy and ask spreads and/or option pricing input variables (1)-(7). Forexample, option pricing input variables (1)-(7) discussed above couldchange, perhaps due to a change in the trader's assessment of marketconditions. These changes may occur when the trader enters newinformation through a trader station 230 or when new information becomesavailable through another source (e.g., a change in interest rate occursin a database associated with the trading site 200). A change in one ormore of option pricing input variables (1)-(7) triggers a re-computationof (probably) all values in the theoretical price table 435. As notedabove, re-computation may involve re-calculating the theoretical pricein its entirety or using pre-calculated values, extrapolation, and/orinterpolation. For purposes of discussion below, assume option pricinginput variable (1), the price of the underlying security, changes andthereby changes a theoretical buy or sell price of a particular optionin theoretical price table 435. Decision logic 450 will compare thecurrent market ask (bid) price of the option to the new theoretical buy(sell) price obtained from the theoretical price table 435. In thiscase, the decision logic 450 performs all comparisons affected by thechange in underlying price. For example, a change in the bid (ask) priceof the underlying security may affect the theoretical buy (sell) priceof some or all call options and the theoretical sell (buy) price of someor all put options associated with the underlying security. Accordingly,the decision logic 450 makes comparisons of market bid or ask pricescorresponding to new theoretical sell and buy prices.

Consider example (2) in which the market bid (ask) price for aparticular option changes and the theoretical prices of the optionremain constant. The decision logic 450 will compare the new market bid(ask) price to the corresponding theoretical sell (buy) price thatexists at that time from the theoretical price table 435. Accordingly, achange in market bid (ask) price of a particular option may trigger acomparison of market bid (ask) price to theoretical sell (buy) price.Based on the comparison, for example, if the market bid (ask) price isgreater (less) than or equal to the theoretical sell (buy) price, theautomated trading system may prepare a response (such as an order orquote) for the particular option.

Consider example (3) when automated buying or selling trading for aparticular option is changed from disabled to an enabled state. Thiscould arise, for instance, at the beginning of the trading day if thedefault state of a new trading session on trading station 230 is alloptions disabled. Enabling automated selling (buying) for a particularoption or group of options can trigger decision logic 450 to make acomparison of the market bid (ask) prices to the theoretical sell (buy)price in table 435.

In addition to enabled and disabled states, a third, “swarming up” or“test” state may be provided for an option in the automated tradingsystem. In this third state, the automated trading system may performall steps except actually placing an order. This allows the trader tomonitor the operation of the automated trading system without actuallysubmitting orders, thereby reducing the risk of enabling options forautomatic trading using theoretical prices which are not marketrealistic.

Consider example (4) in which a safety check for a particular option isrelaxed. This could arise, for example, if a global safety checkcondition implemented by safety check logic 460 is disabled or changed.For example, a safety check condition relating to the maximum quantityor frequency of trading attempts of a particular option may be increasedvia a command from trading station 230. In connection with the tradingfrequency condition, the entire automated trading system may be held ina “pause” state if it had made more than a predetermined number (e.g.,3) automated trading attempts within a predetermined time period (e.g.,60 seconds). If this global safety check is disabled or relaxed, forexample, by increasing the predetermined number of attempts (e.g., from3 to 5), the trading frequency safety check may no longer be inviolation. As a result, the entire automated trading system maytransition from the “paused” state to the enabled state. If a particularoption had been enabled for automated selling (buying), the decisionlogic 450 will then compare the market bid (ask) price to thetheoretical sell (buy) price in table 435.

Of course, the automated trading system may be designed to automaticallyswitch from the “enabled” to “paused” state if conditions are deemed toorisky to run automated trading. For example, the automated tradingsystem may change from an “enabled” state to a “paused” state when itsenses, or receives a message, that: (1) communication in any of thecommunication links is not working properly, (2) trading has halted orclosed in the underlying security and/or options of a particularsecurity, (3) the options for a particular security are trading in a“fast market”, as determined by exchange officials, (4) the differencebetween the ask and bid price of the underlying security is greater thansome predetermined value, (5) the rate of change of the price of theunderlying security is greater than some predetermined value, (6)trading in the underlying security is in an “auction” or “crossing”state, rather than normal “bid” and “ask” trading, and/or (7) release ofknown news events is pending. Assume the system automatically went intothe “paused” state due to one of the conditions above. The system can bedesigned to either automatically go into the “warm-up” state when thetriggering condition has passed, or require manual intervention to movefrom the “paused” to the “warm-up” stage. Obviously, the system shouldbe designed to also let the trader manually switch the automated tradingsystem from “enabled” to the “paused” state whenever the trader desires.

Decision logic 450 determines that a sell (buy) order should besubmitted if the market bid (ask) price is greater (less) than or equalto the theoretical sell (buy) price. Even if decision logic 450determines that an order should be submitted, safety check logic 460 maybe used to prevent an order from being submitted. Safety check logic460, for example, can block orders entirely, or put a cap on the maximumquantity attempted to be bought or sold, for an option when acceptanceof that order would result in the trader having a position greater thana predetermined threshold quantity of that option. A trader may be alsoset a limit on, say, the total delta of an automated trading attempt.This may arise if she is concerned about the potential size of the deltahedge that might be needed relative to the depth and liquidity of theunderlying security market. This would mean that each option might havea different maximum quantity and the quantity would be inverselyproportional to the delta of the option. Also, the automated tradingsystem may be paused or stopped if the number of attempted ordersexceeds a predetermined amount in a predetermined period of time. Theconstraints may be stored in option data table 430 or elsewhere and maybe varied for individual options. Other constraints may involvegenerating warnings and/or preventing orders, for example, when: (1) thetheoretical buy price exceeds the theoretical ask price, (2) thetheoretical buy price exceeds the theoretical value, (3) the theoreticalsell price is less than the theoretical value, (4) the price of theunderlying security moves outside some range, and/or (5) the theoreticalsell price is less than the intrinsic value of the option. The intrinsicvalue may be defined as the difference between the strike price and themarket price of the underlying security for puts, and the differencebetween the market price of the underlying security and the strike pricefor calls, where the minimum intrinsic value is zero. The trader may beable to override some or all of the checks performed by safety checklogic 460 to increase speed of automated trading.

If the safety checks are passed (or overridden), order logic 470 createsa response and submits the response to the exchange site 100 via anoutput interface 480. The trading station 230 may be notified through atrading station interface whether or not the safety checks are passed.The output interface 480 may pass the order to exchange interfacesoftware for ultimate transmission to the exchange site 100. Thereceiver interface 410 and the output interface 480 may be formed bycommon equipment and/or data ports.

The option data table 430 and theoretical price table 435 can be checkedperiodically to ensure the accuracy of its content. For example, checksmay be performed every, say, 15 seconds. This can be done, for example,by performing a checksum operation in which the entries of tables 430and 435 table are summed and the sums are compared with the sums of acorresponding tables maintained by a trader station 230. If the sumsmatch, option data table 430 and theoretical price table 435 may bepresumed to be accurate. If the sums do not match, a warning isgenerated and automated trading is stopped completely or paused untiloption data table 430 and theoretical price table 435 are reloaded orupdated and accuracy can be ensured. Of course, other or additionaltechniques for testing the accuracy of tables 430 and 435 may beimplemented. Moreover, such an accuracy check may be omitted if one issufficiently confident in the reliability of the software, hardware andcommunication networks.

Knowledge of how the search protocol locates data within the option datatable 430 and theoretical price table 435 may be used to structure thesetables to ensure that selected options will be located particularlyquickly. The selected options may be, for example, frequently tradedoptions and/or options whose price will become attractive with a smallchange in the underlying security price. For example, the searchprotocol may conduct searches by starting at the first row of the tableand then stepping through each successive row until a particular row isidentified. In this case, the tables 430 and 435 may be structured sothat a select option is placed in the first row. Consequently, thesearch protocol will locate the select option first. Statistics may bemaintained, for example, at a trader station 230, and used torestructure the tables 430 and 435 as trading conditions change.Further, when the market price of the underlying security changes, thetheoretical price logic 490 may calculate the new theoretical prices inthe same predetermined order as the search protocol, with the newlycalculated theoretical price acted upon by the decision logic 450 eitherbefore or during calculation of the next theoretical price. In this way,the automated trading system calculates theoretical value and makestransaction decisions first for options believed to be most likely togenerate profitable transactions, whether the decision logic 450 istriggered by a change in market price of the option, by a change intheoretical value, or otherwise.

The embodiment described in connection with FIG. 3 compares the currentmarket price of an option to theoretical buy and sell prices from atheoretical price table 435 to make a buy/sell decision. However, othertransaction values may be compared consistent with the presentdisclosure to generate buy/sell decisions. For example, the theoreticaloption value may be subtracted from the market bid (ask) price andcompared to a sell (buy) spread selected by the trader to generatebuy/sell decisions. Alternatively, implied volatilities may becalculated for market option bid (ask) prices using, say, mathematicalmodels and inputs similar to those used for calculating theoreticaloption prices. These calculated implied volatilities may then becompared to trader-defined theoretical volatility values to makebuy/sell decisions. Of course, other values may also be indexed and usedfor comparison to generate buy/sell decisions consistent with thepresent disclosure.

FIG. 4 illustrates an embodiment of a trader screen 500 displayed on atrader station 230 in connection with trading options on a particularsecurity or commodity. The trading screen 500 may provide a graphic userinterface to enable the trader to set parameters associated withautomated trading. Trading screen 500 is organized as an array of cells510. The rows 512 of the array represent different options available inthe market for the particular security or commodity. The columns 514 ofthe array provide information concerning the options. More particularly,the columns to the left of the “Strike” column provide information oncall options and the columns to the right of the “Mon” column provideinformation on put options. Call and put options are, thus, displayed asmirror images of each other.

Each row of the array represents information relating to a differentpair of call and put options for a particular strike price, month andyear. The first column from left to right is labeled “DCX,” whichidentifies the underlying security for the options as Daimler-Chryslerstock. The values below the “DCX” label consecutively number the rows ofthe array. The trading screen may be scrolled up or down to viewadditional rows in the array, if any exist. The next fourteen columnscontain information relating to call options. The second column, “POS,”is to the right of the “DCX” column. The values below the column headingPUS indicate the trader's position (i.e., how many of the options thetrader possesses) in call options for each row of the array. A negativecell value in the “POS” column indicates that the trader has sold moreof the option than she has bought (this is called a short position.Positive values denote a long position). Cells in the “B” column (threecolumns to the right of the “PUS” column) indicate whether automatedbuying is enabled for the particular options corresponding to thosecells. Cells in the “S” column (three columns to the right of the “B”column) indicate whether automated selling is enabled for the particularoptions corresponding to those cells. The trader may select one or moresells in the “B” and “S” columns to enable or disable automated buyingand selling, respectively, of options corresponding to the selectedcells.

The “TBid” and “TAsk” columns indicate the theoretical buy and sellprices for automated trading. The “Theo” column represents thetheoretical value assigned to the call option for each row. To the rightof the “Mon” column, the screen provides “TBid,” “TAsk,” “Theo,” and“POS” columns, among others, for the put options in each row of thearray.

Additional details concerning the remaining columns of the trader screen500, as well as other information concerning its functionality, can befound in U.S. application Ser. No. 09/273,362 to Marynowski et al.,filed Mar. 22, 1999, and U.S. application Ser. No. 09/417,774 toMarynowski et al., filed Oct. 14, 1999, both of which are expresslyincorporated herein by reference.

The “POS” columns usually provide information received from the exchangesite and are not adjustable by the trader. The “TBid,” “TAsk,” and“Theo” columns may be adjusted by the trader using a mouse, keyboard, orother input device, such as a game pad. For example, the trader mayselect a particular “TBid” or “TAsk” cell by clicking once and thenusing up or down arrows, for instance, to increase (arrow up) ordecrease (arrow down) the value. Mathematically, this may be achieved byincreasing or decreasing the bid spread value (BSprd) or the ask spreadvalue (ASprd). Changes made to the BSprd and ASprd values on tradingstation 230 would update option table data 430, and, consequently, maytrigger a recalculation of theoretical price table 435. Note thatchanges to BSprd and Asprd values may not effect the “Theo” value sinceBSprd and ASprd are not inputs into the “Theo” calculation. A particular“Theo” cell may be adjusted in the same manner as a “TBid” or “TAsk”cell. Mathematically, adjustments to a Theo cell may be achieved byincreasing or decreasing the assumed volatility of that particularoption.

Changes made to assumed volatilities on trading station 230 would updateoption table data 430, and, consequently, trigger a recalculation oftheoretical price table 435. The “TBid”, “TAsk”, and “Theo” values mayalso adjustable in groups, for example, by selecting multiple cells orall cells in the column by selecting the column header. The traderstation 230 may update the displayed values of Theo, TBid and TAskvalues as the underlying security price change, or any variablecontributing to Theo, TBid, or TAsk change (such as option pricing inputvariables (2)-(7) discussed above). For example, the trader station 230may receive a market feed providing price information concerning theunderlying security. The price information may be used to update orrefresh the trading screen 500. This may include the displayed TBid,TAsk, and Theo values for a given underlying price.

FIG. 5 provides an exemplary progression of steps from transmission ofthe current market information from the exchange site 100 to receipt oftrade confirmation by the trader site 200 and the delay experienced ateach step. The progression of steps illustrated assumes that theexchange-required interface software runs locally on backend computers220 and 225. Link 1 represents the line delay experienced by currenttrading information as it is transmitted from the exchange site 100 tothe trader site 200. Locating the automated trading system close to theexchange site 100 reduces the line delay of Link 1 (as well as that ofLink 15). Thus, by reducing the delay associated with making automatedtrading decisions as well as the associated line delay, the overallspeed in submitting orders to the exchange site 100 is increased.Moreover, the trader station 230 that monitors and controls the backendcomputer 225 that implements the automated trading need not be locatedclose to the exchange site 100, but may monitor and control the backendcomputer 225 remotely.

Link 2 represents delays associated with operating system (networkingsubsystem) related to receiving data packets from the exchange site 100.One technique for reducing this delay is to choose a platform, such asVMS or Linux, that has a good quality implementation of networkingservices used in automated trading.

Link 3 represents delays associated with decompressing informationreceived from the exchange site 100. Link 4 represents other processingdelays that may be inherent in exchange interface software provided bythe exchange for use at the trader site 200. The exchange interfacesoftware allows the trader's equipment to interface with the exchangeequipment The exchange may impose obligations requiring traders to usethe exchange interface software in trading. The exchange interfacesoftware, for example, may process the received market data and supplythe data to an interface of an automated trading application installedby the trader. For instance, the market data may be input to internaltables and/or may be converted to actual values. Links 5 and 6 representdelays associated with the distribution of information from the exchangeinterface software to an interface of the trading system application.The exchange site 100 typically broadcasts information concerning alltraded items. Each trading application usually subscribes to severalsources of data (e.g., market data and trade confirmations for severalproducts). In some cases, the exchange interface software will receiveand decode all information received from the exchange site 100, but onlypass some of the information to the interface of the automated tradingsystem. The exchange interface software spends some time in determiningwhether a particular piece of market information should be passed to theautomated trading′ system. The exchange interface software and thetrading system interface software communicate via a protocol. Forexample, the exchange interface software may notify the automatedtrading system via a callback function supplied by the latter, or bysome other operating-system dependent mechanism (e.g., mailboxes onVMS). Choosing a platform that efficiently supports the protocol chosencan reduce this delay.

After receiving the current market information, the automated tradingsystem decodes the information and, using a search protocol, searches atable of traded products, resulting in a delay indicated by link 7 a. Ahash table with an efficient hash key or a search tree may be used toreduce the delay associated with the processing associated with link 7a. The particular search protocol should be fine-tuned to the platformused for the automated trading system as performance may vary with theplatform to the extent that a linear search may prove better than a hashtable even for a surprisingly large number of products (over 100). Thelook-up time for hash tables is almost constant. For binary trees, thelook-up time is proportional to the logarithm of N (in O (log N)), whereN is the number of products traded. A linear search has a look-up timethat is proportional to N (in O(N)). Of course, the actual timesencountered in practice matter, so the look-up protocol should betailored to the platform used.

Link 7 b represents the delay in updating the option data table 430 andrecalculating table 435, if necessary. Current market informationreceived in link 7 a may include new prices related to the underlyingsecurity. A new underlying security price may trigger the underlyingsecurity price values in option data table 430 to be updated. This, inturn, may trigger a recalculation of values contained in the theoreticalprice table 435. Of course, current market information in link 7 a mayalso contain other variables that may effect the theoretical price table435. In such cases, similar steps of updating option data table 430 andrecalculating theoretical price table 435 may be necessary. If currentmarket information received in link 7 a does not change any value inoption table 430 that effects theoretical price table 430, no actionsare taken and the process continues to link 8, bypassing link 7 bcompletely. Of course, values in option data table 430 may be updatedfrom other sources besides exchange site 100. For example, tradingstation 230 may send a new assumed volatility for a particular optionwithout backend computer 225 processing links 1-7 a. In this case,option data table 430 and theoretical prices table 435 will be updatedin link 7 b and the process continues to link 8.

Link 8 represents the delay attributable to decision-making and safetychecks. As noted above, decisions are made based on a numeric comparisonbetween the current market price and the corresponding theoreticalprice. Safety checks account for most of the delay experienced in link8. Safety checks may include, among other things: (1) price and quantityreasonability checks, (2) trade attempt frequency limitations, and (3)underlying bid and ask price checks.

Links 9-15 corresponds to the delay associated with composing an orderand submitting the order to the exchange. In particular, link 9 reflectsthe time spent composing the order, which may require a format definedby the exchange. Link 10 corresponds to the time required for theautomated trading system output interface to communicate the order tothe exchange interface software, This may be done, for example, using asynchronous function call or an asynchronous call. In some embodiments,the tasks associated with links 9 and 10 may be performed at the sametime. Links 11 and 12 correspond to the time expended while the exchangeinterface software receives the order, decides which module should beused to submit the order, interprets the order request, and performs aseries of validations. If the order passes these tests, it is convertedinto the exchange format and passed to the exchange, as indicated bylinks 13-15.

Links 1 and 15 may include any delays occurring between the trader site200 and the exchange site 100, including, for example, any delaysattributable to an intermediary, such as a broker. As noted above, thedelays attributable to links 1 and 15 may be reduced by locating theautomated trading system close to the exchange site 100. If, forexample, the exchange site for an option is located in a city distantfrom the exchange site for the underlying stock, the trader site may belocated in between the two exchange sites to reduce transmission delays,or closer to the exchange site that is expected to trigger the mosttrading activity for the automated trading system and thus minimize theeffect of transmission delays on automated trading. In addition, ifrouters and LANs are used at the trader site 200, the selection ofhigh-speed equipment may reduce delays and/or priority schemes. Thedelay experienced in links 2-14 may be reduced, of course, by using afaster computer. However, the efficiency of the software and algorithmsis also an important factor in reducing delay. Further, in somesituations, it is possible to integrate the automated trading systemsoftware with the software that interfaces with the exchange site 100,which leads to reduced delay. In such a case, the automated tradingsystem receiver and output interfaces may be the same as the exchangereceiver and output interfaces.

Link 16 reflects the processing of the order at the exchange site 100.Following the exchange site 100 processing, a confirmation of the tradeis returned to the trader if the trader's order is matched. Not allorders result in a match. There may be no sharing of lucrative tradeswith other traders who may have submitted similar matching orders thatare received by the exchange even some microseconds later.

As noted above, the embodiment illustrated in FIG. 5 corresponds to anarrangement in which the interface software provided by the exchange andthe automated trading system are resident on the backend computer 225.In arrangements in which the interface software and the automatedtrading system are resident on separate backend computers, the verticaldashed line 610 indicates the interface between the separate computers.The separate backend computers may be connected via network interfacecards or a common hub. Additional delays may be experienced in thetransmission and reception of between the backend computers as well asfrom LAN throughput and latency.

In arrangements in which there is no exchange-provided interfacesoftware running locally on backend computers 220 and 225, steps 24 and10-14 may be performed by the automated trading software or eliminatedcompletely. For example, steps 10 and 11 may not be needed since theyare usually associated with communication between two applications, andnot communication within a single application. Similarly, the trader maybe able to choose not to perform the processing and pre-order validationperformed in step 12 when using the proprietary trader system software.Whether or not compression per step 13 is performed depends on thecommunications protocols supported by the exchange. These protocols maybe spelled out in an application programming interface (API) manualprovided to the trader by the exchange.

Moreover, in arrangements in which an intermediary such as a broker orclearing agent is included in the communication routing between tradersite 200 and exchange site 100, steps 2-6 and 10-14 may be performed bycommunication software provided by the intermediary, or software thatuses API's provided by the intermediary and is developed by the traderor some third party vendor. In this case, the intermediary would thus beresponsible for translating communications between its protocol and thatof the exchange before routing messages between the exchange and thetrader. This would of course be outside the control of the trader andwould introduce additional delays in the total response.

FIG. 6 provides a schematic of an embodiment of an electronic tradingexchange system network 70 coupled to multiple trading sites. Theelectronic trading exchange system network 70 is similar to that shownas 10 in FIG. 1 and, for the sake of brevity, duplicative descriptionwill be omitted.

As shown in FIG. 6, exchange site 700 is coupled to trader site 200 bycommunication links 300. In one embodiment, the exchange site 700 may bedesigned as a local area network (LAN) and include, for example, one ormore security routers and one or more back office computers, among otherequipment. For purposes of illustration only, a single security router710 and three back office computers 730-1, 730-2, 730-3 (referred tocollectively as back office computers 730) are shown in FIG. 6. Securityrouter 710 controls communications between the back office computers 730and the communications link 300. Security router 710 transmits andreceives communications over the communications link 300, as well asrestricts communications from unauthorized sources. More particularly,the security router 710 may be used to isolate the equipment at theexchange site 700 from intrusion and facilitate communication with theback office computers 730. The back office computers 730 manage thetrading of the various securities, currencies, commodities and/or otheritems traded on the exchange. In this regard, back office computers 730may function similarly to the back office computers 130 of exchange site100.

For purposes of illustration only, trading site 200 additionallyincludes a security router 213 and a backend computer 223 coupled to hub240. The security router 213 and backend computer 223 may be locatedremotely from other equipment of the trader site 200. Security router213 transfers trading information between the trading site 200 and theexchange site 700. As above, the security router 213 screenscommunications from unauthorized sources. Backend computer 223 may beconfigured as a communication server for the trader stations 230. Hub240 handles communications between backend computer 223 and traderstations 230.

In the embodiment shown in FIG. 6, trader site 200 is connected to afirst exchange site 100 and a second exchange site 700. Of course, othernetwork arrangements may be used in connection with the presentdisclosure. Through the first exchange site 100, the trader site 200 mayreceive market information and trade securities, such as options,futures, and other derivatives; currencies, stocks, bonds, and otherphysicals like corn, metals, electricity, etc., and/or other items.Through the second exchange site 700, the trader site 200 may receivemarket information and/or trade securities and/or other items. Traderssite 200 receives market information and trades securities or otheritems related to the securities or other items traded through the firstexchange site 100.

The trader site 200 may be equipped with hedging capability thatfacilitates buying or selling securities and/or other items traded onthe exchange to hedge at least some of the risk (for example, deltarisk) associated with an automated trade for other securities or items.For example, trader site 200 may trade options for a particular stockthrough exchange site 100 and the particular stock through exchange site700. In general, two types of orders may be submitted to an exchange tobuy (sell) a security. A market order instructs the exchange to buy(sell) a specified quantity of the security at the going market price. Alimit order instructs the exchange to buy (sell) up to a specificquantity of the security if the market price is equal or better than aspecified value. A trader usually can be assured that (under mostcircumstances) a market order will be filled by the exchange, but cannotbe certain of the price at which the order is filled. The actual pricethat the market order is filled depends on available price and depth ofmarket. While the trader placing a limit order can be assured of aprice, all or a portion of the limit order may never be filled if themarket price never meets the limit order conditions.

The principles of a market order and a limit order are illustrated bythe following examples.

Matched Market Order Market Order Bid Bid Against Price Quantity to SellPrice Amount Order? Best Available 1000 shares $110/share 400 shares YesMarket Prices $100/share 600 shares Yes  $80/share 2000 shares  No

The above table assumes a market with current bids of $110/share for 400shares, $100/share for 600 shares and $80/share for 2000 shares, asindicated above. A market order to sell 1000 shares will be executed bythe exchange at an average price of $104/share. In other words, the 1000share market order will be matched with 400 shares at $110/share and 600shares at $100/share, for a net of 1000 shares at an average price of$104/share.

If the bid of $110/share for 400 shares is sold just before the marketorder is received, the following market is presented.

Matched Market Order Market Order Bid Bid Against Price Quantity to SellPrice Amount Order? Best Available 1000 shares

Not Market Prices Available $100/share 600 shares Yes  $80/share 2000shares  Yes

Because 400 shares at $110/share is no longer available, the exchangewill match the market order using 600 shares of the $100/share bid and400 shares of the $80/share bid, resulting in an average price of$92/share.

We next consider a similar scenario using limit orders instead of marketorders.

Matched Limit Order Market Order Bid Bid Against Price Quantity to SellPrice Amount Order? $100/share 1000 shares

Not Available $100/share 600 shares Yes  $80/share 2000 shares  No

Now assume that a limit order to sell 1000 shares at $100/share issubmitted instead of the market order and the $110/share bid has alreadybeen matched. The exchange will match 600 shares of the limit order at$100/share and will not match the remaining 400 shares because the$80/share bid is too low. Accordingly, the remaining 400 shares of thelimit order will stay in the exchange's book until a new matching orderto buy at $100/share or higher is received by the exchange, which maynever occur, or until it is cancelled.

As discussed above, order submission in the automated trading systemdepends, for example, on the price of the underlying security, which isliable to change frequently. Thus, if the automated trading system makesan option trade, the trader may wish to hedge the risk associated withunderlying price movement. This risk, commonly called delta risk, may bequantified using mathematical models. These models may be similar to, orthe same as, the models used for determining theoretical option pricesusing option pricing input variables (1)-(7) discussed above. The optionlot size (shares per option contract) and number of option contractstraded are typically factored into the hedging decision. The option lotsize is typically defined by the options exchange when the contract iscreated and changed only under special circumstances, such as capitaladjustments. The number of options that the trader has bought or soldmay be included in the confirmation notice transmitted from the optionsexchange. Accordingly, assuming a total delta hedge is desired, a tradermay determine the quantity of the underlying security to be bought orsold after each option trade based on: (1) mathematical models,including price of the underlying security, (2) options lot size, and(3) number of options traded.

As noted above, the price of the underlying security may be defined inseveral different ways. A typical hedging response of an option tradewill be to buy or sell the underlying security. Specifically, buying(selling) calls and selling (buying) puts will usually lead to selling(buying) the underlying for delta hedging. Since the trader will need tosell (buy) the underlying to hedge the delta risk, he may be mostinterested in the bid (ask) price of the underlying security. Whiledelta risk is referred to specifically, it should be understood that theautomated hedging feature might be used to hedge other known risks. Forexample, automated hedging may be used to hedge the vega risk, the riskof a position or trade due to price changes of the options arising fromchanges of an option's volatility.

From a trading perspective, the trader must define how and to whatextent to delta hedge. Obviously, a trader must first decide whether hewants to delta hedge manually, semi-automatically, or fullyautomatically. In any case, he may consider two opposing dynamics: (1)speed of executing the underlying security orders, and (2) executionprice of the underlying security orders. Typically, a trader may chooseto hedge using market orders if she is most concerned about speed ofexecution, or limit orders if she is most concerned about the price atwhich the underlying orders are executed. As described above, entering amarket order will (nearly) always result in the desired quantity beingexecuted, but at potentially unfavorable or unexpected prices.Conversely, entering a limit order will always result in executed priceswhich meet certain criteria (i.e., greater than or equal to limit priceif selling, and less than or equal to the limit price if buying), butonly some or none of the desired quantity may actually be executed. Ofcourse, other types of orders such as Fill Or Kill, and Immediate OrCancel may be considered when designing an automated hedging future butfor brevity, will not be discussed in detail here.

The trader may assess several qualitative factors in deciding whether tosemi-automatically or fully automatically hedge and, if so, whether touse market orders or limit orders. Some of the qualitative factorsinclude: (1) the quantity of delta hedge underlying trade relative tothe depth of the entire underlying market, (2) volatility of theunderlying market, (3) the size of the underlying bid-ask price spreadrelative to the price of the underlying, and (4) the amount of mentalattention the trader can give toward the delta hedge trade. Differenttraders trading options on different underlying securities may opt fordifferent hedging methods. Thus, in one embodiment of the automaticoption trading system of the present disclosure, the trader may choosemanual hedging, semi-automatic, or automatic hedging using market ordersand/or limit orders.

The fully automatic hedging software may be resident on one or more ofthe trader stations 230, a backend computer 220, 223, 225, or otherequipment of the trader site 200, One embodiment of the fully automatedhedging systems will be described in connection with FIG. 6. Backendcomputer 220 receives option trade confirmations from exchange site 100based on an order submitted automatically by backend computer 225.Alternatively, or in addition, backend computer 225 may receive optiontrade confirmations from the exchange site 100. Further, the optiontrade confirmations may correspond to orders submitted eitherautomatically or manually by a trader. Moreover, the option tradeconfirmation may correspond to a quote submitted automatically ormanually by the trader. Thus, backend computer 220 routes the tradeconfirmation to a trader station 230 that is associated with theautomatic option trade made by the backend computer 225.

If the manual hedge feature has been selected, trader station 230displays the appropriate hedge action based on factors previouslyentered by the trader. For example, the trader may see a message such as“buy 4500 shares” of the underlying security. The trader would have theresponsibility of executing the hedging trade, if she desired. If thesemi-automatic hedging using a limit order has been selected, traderstation 230 would automatically display a dialogue box to the trader.The dialogue would include information (such as type of order, price,quantity, buy or sell) related to the potential hedging trade. If thetrader is comfortable with these specifications, she may then submitthis particular hedging order through actions on the keyboard, mouse,gamepad or other input device of trading station 230 (e.g., voiceactivation equipment). Alternatively, the trader could modify some orall of the specifications of the order before submitted the order. Ofcourse, the trader may have the ability to cancel the dialogue boxentirely if she wished not to hedge that particular option trade usingthe semi-automated hedging feature. If the automatic hedging usingmarket orders feature has been selected, trader station 230automatically submits a market order, for example to buy 4500 shares atthe market prices, to exchange site 700 via backend computer 223. At theexchange site 700, the market order will (nearly) always be immediatelyfilled by buying 4500 shares, albeit at a potentially unexpected orundesirable average price for those shares.

If automatic hedging using a limit order has been selected, traderstation 230 automatically submits an order, for example to buy 4500shares at a price of 68.05, to exchange site 700 via backend computer223. The default limit price specified in the semi-automated and fullyautomated hedging orders may depend on the current underlying marketand/or parameters pre-defined by the trader. For instance, the tradermay define the price to use when buying the underlying security withsemi- or fully automatic hedging as, perhaps, either (1) current askprice, since she is buying, (2) average of current bid and ask price,(3) last traded price, or (4) the ask price at which the automatedoption trade was triggered, regardless of the current underlying prices.Depending on the market conditions, exchange site 700 may not be able tomatch the limit order immediately, if ever. Exchanges typically enablethe trader to modify or delete partially matched or completely unmatchedlimit orders. In some cases, the exchange site through which theunderlying security is traded may depend on the option traded. Forexample, both futures of an equity index (e.g., Standard and Poor's 500)and options on the same equity index may be traded through exchange site100. A stock may be traded through exchange site 700, but options forthe stock may be traded through exchange site 100. In such a case, thesystem configurations at either the trader station 230 performinghedging or other equipment at trader site 200 must ensure that hedgeorders are routed to the appropriate exchange.

While the above-embodiments have been described in terms of arrays ortables, it should be understood that data may include or be maintainedin other organizational memory constructs consistent with the presentdisclosure, for example, linked lists, trees, heaps, hash lists, or somecombination, or any other data structure or combinations of datastructures useful in implementing a search algorithm. In addition, thetrader site 200 is described as submitting orders to the exchange site100 using the automated trading system. However, the trader site 200 maysubmit its “order” in the form of a quote to the exchange site, wherethe bid (ask) price of the quote corresponds to the theoretical buy(sell) price if, say, the trader wanted to buy (sell) the item.

It will be apparent to those skilled in the art that variousmodifications and variations can be made without departing from thescope or spirit of the disclosure. For example, the present disclosuremay be applied in areas other than electronically-traded securities, forexample, the purchase and/or sale of goods or services, contests,auctions, and other applications in which fast, accurate responses aredesirable. Other embodiments of the disclosure will be apparent to thoseskilled in the art from consideration of the specification and practiceof the disclosure disclosed herein. It is intended that thespecification and examples be considered as exemplary only, with a truescope and spirit of the disclosure being indicated by the followingclaims.

The invention claimed is:
 1. A system comprising: an automated tradingsystem communicatively coupled to an electronic exchange system, saidautomated trading system comprising one or more computers executinginstructions that cause said one or more computers to perform theautomatic steps of: receiving one or more static variables and one ormore dynamic variables; generating, at a first time point,pre-calculated price information using at least one of the one or morestatic variables; storing the pre-calculated price information in asearchable format; automatically switching the automated trading systeminto a paused state upon sensing or receiving a message indicating anexistence of a triggering condition within the system; automaticallyswitching the automated trading system into an enabled state uponsensing that the triggering condition has expired; generating, at asecond time point, the theoretical price for the first traded item usinga theoretical price model, the theoretical price model utilizing the oneor more static variables, the one or more dynamic variables, and thestored pre-calculated price information; receiving information relatedto the first traded item from the electronic exchange system after thetheoretical price is generated; and automatically transmitting, to theelectronic exchange system, a request for one or more markettransactions based at least in part on the received information and thepre-calculated price, thereby causing the electronic exchange system toexecute the one or more market transactions automatically for the firsttraded item.
 2. The system of claim 1, wherein the automated tradingsystem comprises: a receiver interface that receives the informationrelated to the first traded item from the electronic exchange system; atheoretical price logic that generates the pre-calculated priceinformation; decision logic that uses at least a portion of the receivedinformation and at least a portion of the pre-calculated priceinformation to generate a decision as to whether to initiate the one ormore market transactions for the first traded item; and an outputinterface that automatically outputs the request for the one or moremarket transactions to the electronic exchange system in response tosaid decision.
 3. The system of claim 1, wherein the receivedinformation related to the first traded item comprises marketinformation.
 4. The system of claim 2, wherein the theoretical pricelogic generates the pre- calculated price information based oninformation related to a second traded item, the second traded itembeing related to the first traded item.
 5. The system of claim 4,wherein the information related to the second traded item comprisesprice information.
 6. The system of claim 1, wherein the automatedtrading system comprises at least one dedicated computer that issubstantially dedicated to solely performing automated tradingfunctions, said at least one dedicated computer comprising a receiver, atheoretical price logic, a decision logic, and an output interface. 7.The system of claim 1, further comprising one or more trader stationscommunicatively coupled to the automated trading system.
 8. The systemof claim 7, further comprising at least one back end computer that isdedicated to solely performing non-automated trading functions,including at least one of: serving as a gateway to communicate data andinformation from the electronic exchange system to the trader stations,submitting, deleting and modifying orders and quotes to the electronicexchange system from the trader stations, receiving real-time tradeconfirmations and end-of-day back office reports, performing riskanalysis, performing position management and performing accountingfunctions.
 9. The system of claim 1, wherein the one or more markettransactions comprise at least one of a market order, a limit order, afill or kill order, a cancel order, a quote order and a modified order.10. The system of claim 1, wherein the first traded item comprises oneor more of an option, a future, a swap, a stock, a stock index, a bond,a commodity, a currency, a physical and an underlying security.
 11. Thesystem of claim 10, wherein the option comprises one or more of anoption on a commodity, an option on a commodity future and an option onan index.
 12. The system of claim 10, wherein the future comprises oneor more of a future on a bond, a future on a commodity and a future on astock index.
 13. The system of claim 10, wherein the physical comprisesone or more of an energy-related product, an agriculture-related productand a metal-related product.
 14. The system of claim 4, wherein thefirst traded item comprises an option and the second traded itemcomprises one or more of a second option, an underlying security, a bondand a swap.
 15. The system of claim 4, wherein the option comprises anoption on an index and the second option comprises an option on the sameindex.
 16. The system of claim 4, wherein the first traded itemcomprises a future and the second traded item comprises a second future.17. The system of claim 16, wherein the future and second future havedifferent expiration dates.
 18. The system of claim 16, wherein thefuture comprises a future on a first commodity and the second futurecomprises a future on a second commodity.
 19. The system of claim 4,wherein the first traded item comprises a swap and the second tradeditem comprises at least one of an option and an underlying security. 20.The system of claim 4, wherein the first traded item comprises a bondand the second traded item comprises at least one of an option and anunderlying security.
 21. The system of claim 4, wherein the first tradeditem comprises an underlying security and the second traded itemcomprises at least one of an option, a future, a bond and a swap. 22.The system of claim 2, further comprising at least one additionalelectronic exchange system, said output interface automaticallyoutputting the request for the one or more market transactions to atleast one of said electronic exchange system and the at least oneadditional electronic exchange system.
 23. The system of claim 2,wherein the automated trading system further comprises: decision logicthat automatically generates one or more hedge transactions to hedge atleast some of the risk associated with the one or more markettransactions, wherein said output interface automatically outputs arequest for the one or more hedge transactions and the one or moremarket transactions in response to said decision, and wherein theelectronic exchange system receives and executes the request for the oneor more hedge transactions and the one or more market transactions fromthe output interface.
 24. The system of claim 23, wherein execution ofthe one or more hedge transactions hedges at least one of delta risk andvega risk associated with the one or more market transactions.
 25. Thesystem of claim 23, wherein the first traded item comprises aderivatives instrument and the one or more hedge transactions comprise atransaction for an underlying of the derivative instrument.
 26. Thesystem of claim 25, wherein the underlying comprises at least one of asecurity, an equity and a future.
 27. The system of claim 23, whereinthe one or more hedge transactions comprise at least one of a marketorder, a limit order, a fill or kill order, a cancel order, a quoteorder, an order for an option, an order for a future, an order for aswap, an order for a stock, an order for a stock index, an order for abond, an order for a commodity, an order for currency and an order for aphysical.
 28. The system of claim 23, further comprising at least oneadditional electronic exchange system, said output interfaceautomatically outputting the request for the one or more markettransactions and the one or more hedge transactions to at least one ofsaid electronic exchange system and the at least one additionalelectronic exchange system.
 29. The system of claim 1, wherein theautomated trading system, the electronic exchange system and theirrespective components are connected and communicate via at least one ofa wired communications network, a wireless communications network,microwave communications and satellite communications.
 30. A systemcomprising: an automated trading system communicatively coupled to anelectronic exchange system and one or more trading stations, said one ormore trading stations executing computer-readable software forcontrolling automated trading functions of the automated trading system,the automated trading system comprising a backend computer performingthe automatic steps of: receiving one or more static variables and oneor more dynamic variables, generating, at a first time point,pre-calculated price information using at least one of the one or morestatic variables, storing the pre-calculated price information in asearchable format, automatically switching the automated trading systeminto a paused state upon sensing or receiving a message indicating anexistence of a triggering condition within the system, automaticallyswitching the automated trading system into an enabled state uponsensing that the triggering condition has expired, generating, at thesecond time point, the theoretical price for the first traded item usinga theoretical price model, the theoretical price model comprising theone or more static variables, the one or more dynamic variables, and thestored pre-calculated price information, receiving information relatedto the first traded item from the electronic exchange system after thetheoretical price is generated, and automatically transmitting, to theelectronic exchange system, a request for one or more markettransactions based at least in part on the received information and thepre- calculated price, thereby causing the electronic exchange system toexecute the one or more market transactions automatically for the firsttraded item.
 31. The system of claim 30, wherein the computer-readablesoftware causes the one or more trading stations to generate the controlinstructions and transmit the control instructions to the automatedtrading system.
 32. The system of claim 31, wherein the controlinstructions cause the automated trading system to at least one ofenable and disable automated trading for one or more traded items. 33.The system of claim 31, wherein the control instructions cause theautomated trading system to prioritize automated trading functions overother tasks or processes run by the automated trading system.
 34. Thesystem of claim 31, wherein the control instructions provide informationused by the automated trading system to determine whether toautomatically generate the at least one request for the one or moremarket transactions.
 35. The system of claim 30, wherein the one or moretrading stations are communicatively coupled to the automated tradingsystem via at least one of a wired and wireless communication link. 36.The system of claim 30, wherein the one or more trading stations arecommunicatively coupled to the electronic exchange system and areconfigured to receive and process information from the electronicexchange system and display at least a portion of said information to atleast one user via at least one monitor.
 37. The system of claim 36,wherein the at least one user comprises at least one of a trader,broker, market maker, clearing agent and a retail customer.
 38. Thesystem of claim 1, wherein the instructions further cause the one ormore computers to perform the automatic steps of: determining that atleast one of the one or more dynamic variables have changed; andregenerating the theoretical price for the first traded item using theat least one of the one or more dynamic variables.
 39. The system ofclaim 1, wherein the instructions further cause the one or morecomputers to perform the automatic steps of: comparing at least aportion of the information related to the first traded item and thetheoretical price; automatically determining whether to execute thee oneor more market transactions based on said comparing; and automaticallygenerating the request for the one or more market transactions.
 40. Thesystem of claim 30, wherein the backend computer further performs theautomatic steps of: determining that at least one of the one or moredynamic variables have changed; and regenerating the theoretical pricefor the first traded item using the at least one of the one or moredynamic variables.
 41. The system of claim 30, wherein the backendcomputer further performs the automatic steps of: comparing at least aportion of the information related to the first traded item and thetheoretical price; automatically determining whether to execute thee oneor more market transactions based on said comparing; and automaticallygenerating the request for the one or more market transactions.